The S&P/ASX 200 pared early gains to finish Thursday down 27 points, or 0.31 per cent, to 8,565.1, as the broader All Ordinaries fell 23.7 points, or 0.27 per cent, to 8796.
The drop came as the United States authorised the partial evacuation of non-essential embassy staff from Iraq, Kuwait and Bahrain after Iran promised to retaliate against any air strikes on its nuclear facilities.
Defence also dominated the local news cycle after the US announced a review into the AUKUS defence agreement, renewing debate about Australia's military spending.
In mixed trade news, President Donald Trump said he was willing to extend a July 8 reciprocal tariff deadline for some of roughly 15 countries negotiating with the US, but dozens of other nations would receive written tariff ultimatums in the coming weeks.
"I think markets were just kept guessing on a regular basis," CommSec markets analyst Steven Daghlian told AAP.
"But also I think it's important to remember that yesterday we hit an all-time high, so we are also coming off the back of that."
Seven of 11 local sectors finished higher, led by a 0.7 per cent lift in IT stocks, as Nasdaq futures pointed higher.
The energy sector initially led the gains after the tensions between Iran and the US caused a spike in oil prices, but ultimately finished flat.
Brent crude futures are trading at more than two-month highs for $US68.81 a barrel.
Gold miners rallied as investors sought safety, while defence stocks Austal (up 2.3 per cent) and Droneshield (up 7.8 per cent) pushed higher.
Gold itself rose roughly one per cent since the same time on Wednesday, with futures trading at $US3,392 ($A5,218) an ounce.
Still, materials was the worst performing sector, down one per cent as slipping iron ore prices weighed on large cap miners.
BHP and Rio Tinto lost more than 1.7 per cent each, as Fortescue slumped 3.4 per cent to $15.66.
Mixed miner Mineral Resources was the worst performer of the top-200, down 7.6 per cent as gold play Genesis Minerals took out the top spot, surging 6.3 per cent higher.
Investors took some profits on banks after the financial sector hit a fresh peak on Wednesday, with the big four all in the red.
Westpac trailed the other three, down 0.8 per cent to $33.35, while Australia's most valuable company CBA lost 0.5 per cent but comfortably held above an eye-watering $180 per share after reaching a record $183.19 on Wednesday.
Monash IVF rebounded more than nine per cent after announcing the resignation of chief executive Michael Knaap, but the stock is still down 25 per cent since its latest embryo mix-up went public on Tuesday.
Hearing device manufacturer Cochlear finished the day 0.7 per cent higher, as it released its 8th-generation implant, softening the blow of an earnings guidance downgrade.
Qantas rose more than two per cent to $10.72, not quite recovering its 2.4 per cent loss over the past two sessions, after announcing on Wednesday it would close Jetstar Asia.
The Australian dollar is buying 64.96 US cents, up from lunchtime but down slightly from Wednesday afternoon's 65.13 US cents.
ON THE ASX:
* The benchmark S&P/ASX200 index finished Thursday 27 points lower, or down 0.31 per cent, to 8,565.1
* The broader All Ordinaries lost 23.7 points, or 0.27 per cent, to 8796
CURRENCY SNAPSHOT:
One Australian dollar buys:
* 64.96 US cents, from 65.13 US cents on Wednesday at 5pm
* 93.39 Japanese yen, from 94.53 Japanese yen
* 56.39 Euro cents, from 57.09 Euro cents
* 47.89 British pence, from 48.37 pence
* 107.80 NZ cents, from 108.02 NZ cents
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